It’s been three years since the Fed started tightening monetary policy in 2015. Since then, they have also introduced the strategy to start reducing the size of their balance sheet. The European Central Bank and the Bank of Japan are many steps behind the Fed in their own path towards policy normalization.
Financial markets have had plenty of time to adjust to the changing environment of monetary policy around the world. Emerging economies still are at an earlier stage of the expansionary cycle than the US, and thus have more space to maneuver in a rising volatility environment.
But tighter financial conditions have created some difficulties for emerging economies, especially those with significant external vulnerabilities such as Argentina, Turkey and, more recently, India. Despite the strong fundamentals of EM, there is a possibility that external risks could propagate to other countries that show similar vulnerabilities like South Africa and Indonesia. Our sentiment measurements of monetary policy in EM shows that authorities have been forced to turn more restrictive in order to anchor medium-term expectations (see graph below).
Although EM has shown resiliency and adequate policy response in the current volatile market environment, the most significant challenge they face is the rising economic policy uncertainty mostly in the developed world, particularly the US.
We used our quantitative techniques to process 5,000 daily broker reports and explore the text content to quantify uncertainty of economic policy in the main economies. As the graph below shows, the perception of analysts is that uncertainty of economic policy appears to be the highest in the US, Canada and the European Monetary Union (see graph below).
Higher levels of policy uncertainty may be forcing some emerging economies to have a tighter monetary policy than they would otherwise prefer. Perhaps governments around the world should consider a predictable and transparent approach to economic policy making, just like the Fed has successfully been doing for the past few years.
Rising Policy Uncertainty
(Source: BlackRock, September 2018)
© 2018 BlackRock, Inc. All rights reserved.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
As of 9/30/18. Returns shown are annualized returns. Performance data quoted represents past performance and is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Represented Indices: EM Equities represented by MSCI EM Index. Developed Markets represented by MSCI World Index. Japan represented by MSCI Japan. Europe represented by MSCI Europe. US represented by S&P 500 Index. Frontier Markets represented by MSCI Frontier Index. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 30, 2018, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.
This material does not constitute a recommendation by BlackRock, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. BlackRock does not guarantee the suitability or potential value of any particular investment.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times.
Certain sectors and markets perform exceptionally well based on current market conditions and iShares Funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock").
The iShares ETFs are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., BlackRock Index Services, LLC, BofA Merrill Lynch, Cohen & Steers Capital Management, Inc., European Public Real Estate Association ("EPRA®"), FTSE International Limited ("FTSE"), India Index Services & Products Limited, Interactive Data, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts ("NAREIT"), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above.
©2018 BlackRock, Inc. All rights reserved. BLACKROCK, iRETIRE, ALADDIN, CoRI and iSHARES are registered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.
Prepared by BlackRock Investments, LLC, member FINRA
Not FDIC Insured | May Lose Value | No Bank Guarantee
This post originally appeared on the BlackRock Blog.